The Gazette 1982

GAZETTE

APRIL 1982

surrender by Trader D of his thirty-five year Lease, where the circumstances are such that he became entitl- ed to receive a credit in respect of V.A.T. suffered on the granting to him of such Lease. Leases In the context of the legislation a "disposal" of an in- terest embraces the "creation" of an interest, which, in effect, brings us directly into the realm of Leases, but (bearing in mind the special meaning attributed to the word "interest") we are here, for practical purposes, speaking only of demises of not less than ten years. Pro- vided that the criteria herinbefore mentioned are observed, these will ordinarily attract V.A.T., which will be assessed along the lines referred to below. Apart from the general situation with regard to Leases, there are a few peculiarities, which could conve- niently be noted at this juncture: - (a) Leases granted for terms of less than ten years are deemed to be "self supplies", and are dealt with separately as such hereunder. (b) As mentioned above, Leases for not less than ten years (assuming that they otherwise qualify) at- tract V.A.T. on the granting thereof, but there is an added complication in respect of those within the ten to twenty year bracket. In these cases, tax is exigible not only on the creation of the demise, but also on the reversion, the latter being deemed to be a "self-supply". (c) Reversions on foot of Leases granted for terms in excess of twenty years are deemed to be valueless, and there is, accordingly, no practical implication of "self-supplies" in their regard. (d) So far as I have been able to ascertain, a Lease granted for, say, thirty-five years incorporating a right to terminate prematurely (even within ten years) is deemed to operate as a full disposal, the said right being ignored apropos V.A.T. on the creation of the Lease. (e) A Lease granted ostensibly for a term of less than ten years, but with a contractual (as opposed to a statutory) right to extend such term beyond ten years is apparently treated by the Revenue Com- missioners as creating a taxable interest. Reversions - Disposals Strictly speaking, it could be said that sales of rever- sionary interests are outside the scope of V.A.T. legisla- tion, unless (to revert to a theme which has been previously mentioned, and which runs through the en- tire concept) there has been some circumstance giving rise to the re-incidence of taxation. This is not too like- ly, but it could conceivably happen if the reversioner were to embark on a further development. In the or- dinary situation, Developer E, operating within the V.A.T. code, constructs an Office Block, which he lets on foot of Leases either (i) in excess of twenty years, (ii) in the ten to twenty year bracket, (iii) for less than ten years or (iv) representing a mixture of any two or indeed all three of the said categories. On a subsequent sale of his reversionary interest in the Block, it would appear that there should be no further liability in respect of V.A.T. If the matter falls entirely within (i), the rever- sion is deemed to be valueless for the purpose of this particular element of taxation. If (ii) applies, the rever- 30

sion should have been dealt with on a "self-supply" basis following the granting of the relevant Leases, thereby taking same outside the realm of V.A.T., which latter result would also have been achieved on the crea- tion of the demises exemplified at (iii). The foregoing all assume that the Office Block will have been fully let prior to its proposed disposal. If, however, the sale was made while there was still therein an un-let are^ capable of being let, and which had not been the subject of a "self-supply", so much of the pro- ceeds as would be attributable to the un-let section would attract V.A.T. As will be appreciated, this aspect of the transaction is, of course, not technically a disposal of a reversion. "Self-supplies" These represent a rather unusual and important con- cept, which, in the main, falls to be dealt with under three heads: - (A) The type of situation envisaged above where Con- tractor C - being within the ambit of criteria (1) - and (2) - occupied as his own private residence one of the houses, which he had himself con- structed. (B) The granting of Leases for terms of less than ten years in circumstances where the same two criteria apply to the Lessor. (C) The creation of the reversion on foot of a Lease granted for a term in the ten to twenty year bracket, where the latter falls to be dealt with under the V.A.T. code. Such cases must be strange intruders to the legal mind. Their V.A.T. entanglement is essentially at- tributable to the fact that the "disponer" will in some way or another have become entitled to an input credit of deduction, and I dare say that, in this context, (A) may have a certain logic. The reasoning underlying (B) and (C) may not manifest itself so readily. In the case of (C), the Lessor will, on the granting of the relevant Lease, be treated as having theoretically effected two supplies (both taxable), the first to the Lessee of the leasehold interest created, and the second to himself of the reversion thereon. The V.A.T. payable on a "self-supply" may not be made the subject of a valid tax invoice to another, which, in effect, means that same must be absorbed by the "supplier" - viz. Contractor C in the example at (A) and the respective Lessors at (B) and (C). There could, I believe, be a contractual arrangement whereby the Lessee at (B) would refund to the Lessor an amount equivalent to the V.A.T. suffered by the latter, but I an- ticipate that the Revenue Commissioners, in dealing with the Lessee's V.A.T. Returns, would not countenance a claim by him for a credit or deduction in respect of the sum so refunded. A "self-supply" takes the subject matter outside the V.A.T. code. The latter will not apply to a subsequent disposal, unless (in accordance with the axiom previous- ly mentioned) the disponer takes a deduction or credit for tax charged, or unless he has incurred further expen- diture on the property, in connection with which such a deduction or credit can be substantiated. "Self-supplies" regularly present quite serious dif- ficulties in terms of cash flow and profitability, and their significance should not be overlooked.